Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for June, 2008

As Petrobras becomes the top Latin American oil company, we can’t accept
new blacklists that bar the best from working for Venezuela

Reading
about Petrobras this weekend, I could not help but be envious about the
different routes the two state oil companies Petrobras and our PDVSA have
taken in the last few years. Petrobras, the one time oil importer has
managed in 30 years to make Brazil not only self-sufficient in oil, but a
company for which Brazilians can feel proud about. The article I was
reading in Barron’s (by subscription, but you can read it here:http://www.marketwatch.com/news/story/drilling-deep-flying-high/story.aspx?g
uid={6D03B92C-4F04-431F-936B-F03D73F5877C}) paints the company as
self-sufficient and competent and sitting on top of what may be the biggest
oil find in 30 years, the Tupi field. The article praises Petrobras and its
people saying:

“They’ve been deepwater drillers for 40 years and
have the people and have the processes in place,” she adds. “They’ve got
top-line people. Are they credible? Absolutely.”This contrasts with our
own PDVSA who not only lacks the people required to do the job, but has in
fact sent them over to the competition, principally Canada where they are
shining and demonstrating how good they were.

Meanwhile in
Venezuela, production goes down and recently PDVSA signed a contract with
Schlumberger as it realized how it has lost technological capacity to
sustain operations.Those that were part of PDVSA, 22,000 strong, were
not only fired, but to this day remain blacklisted whether they work in oil
or they make food, their ID numbers are checked at every step so that not
only is it that they can’t sign a contract with PDVSA, they can not even
have access to PDVSA buildings to sell, as one example I know, prepared
food to PDVSA workers. And as Carlos Blanco says so well today,(http://opinion.eluniversal.com/2008/06/29/opi_34919_art_tiempo-de-palabra_92
3103.shtml) our tolerance of earlier blacklists allows new ones to surface.
PDVSA fired 22,000 for participating in the 2002-2003 strike, but in the
end got rid of any one suspect of not being “rojo-rojito”. The 22,000 were
not only fired illegally, but their personal savings and voluntary pension
plans have been confiscated and there is not a Court in the country that
will hear their case. The illegality remains in place backed by
Chavez, his Prosecutors, the Courts, the Comptroller and the People’s
Ombudsman.

And while we hear the stories of success, we don’t hear
the many cases which as Blanco calls them today in his article: “Detrás de
cada excluido hay un drama humano de inmensas proporciones; pero, desde el
punto de vista social hay otro drama que es el de una nación que se priva
de la participación de mucha de su gente mejor preparada” (Behind every
excluded person there is a human drama of inense proportions but, from the
social point of view there is another drama of a Nation that blocks itself
from the participation of many people who are better prepared)

And
the drama is worse the lower level the person fired from PDVSA. The
engineers and technical people, the managers found jobs, left the country
or started their own businesses, but the secretaries and messengers, the
field workers with careers in PDVSA, have suffered the most. Lives
destroyed by the whims of Hugo Chavez and the approval of his sorry
cohorts.And thus, it is Brazil with a quarter of Venezuela’s reserves,
which has become the great Latin American oil company. as PDVSA has had
even trouble trying to certify that it has the reserves that it has been
known for years it has. But in the simple mindedness and ignorance of the
President at PDVSA that certification ahs become the only purpose, never
mind that he has no clue if we can ever get it out of the ground. Certainly
not under his leadership.

Which proves once again how powerful the
concept of The Devil’s Excrement is. Brazil had to build its oil company
under negative circumstances, lacking even the most basic source for its
business. But it not only exploited ethanol in the lean years, but has now
developed all of the country’s oil needs. And in contrast to Venezuela,
Brazil has actually increased gasoline prices in the last few years, not as
much as they have to but enough to make the subsidy irrelevant in contrast
with the irresponsible policies of our Government.

And we keep
chugging along, using up as much as 800,000 barrels of gasoline a day, used
to run subsidized automobiles for the wealthy classes of Venezuela. A
subsidy close to US$ 14 billion a year which represents a perverse subsidy
given away by a Government so that autocrat Hugo Chavez can remain in his
position, literally screwing his constituency without them knowing about
it.

And some of those that ignored the PDVSA firings and subsequent
blacklist are now victims of the new list disqualifying their candidates.
And if we don’t do anything, there will be new lists, new abuses, new
exclusions and new discrimination in a Government that does not pretend to
include every one. And the excluded are needed to make a better Venezuela.
We need every competent person. We need inclusion. We need everyone,
independent of its political beliefs, as long as he/she is there to do a
job and not to turn the job into a political project.

And at the
pace we are going it seems Chavez may have to exclude every single
Venezuelan before we actually do something about it. And so many have been
excluded because they were not loyal, that few competent and independent
thinkers are left yo help a Government that hates “experts”.

Without
the, we will never get Venezuela out of where it is. People have to wake up
and realize they can be next.

Passionate about money: Remember
when the Minister of Justice dismissed the murder of RCTV’s anchorman
Javier Garcia as a “crime of passion” that should not affect society? Well,
as usual the Minister was talking without knowing anything about the case.
Yes, the murderer was caught, but the only passion so far in the case was
that of the murdered for money as the police said the motive was robbery.
Another triumph for the stupidity and incompetence of Minister Rodriguez
Chacin! In any reasonable country he would have resigned six cases
ago.

Supreme Switch: Venezuela must be the only country where the
Supreme Court issues a decision, the decision is published on the Court’s
webpage and sawn into the Court’s records (A strange custom in itself!),
only to be modified when the Government calls the Court and tells it to
change it. This happened this week with the decision by none other than the
former President of the Venezuelan Electoral Board (remember the one that
could barely speak?) on what is considered taxable and when it will be
applicable. The original sentence said it was only regular salaries, which
is the case in the new one, but the old one said it would apply from the
original decision by the Supreme Court, while the new one says starting
next year. The difference is important, as it would imply a credit to all
those that paid taxes this year. This creates a loophole in that companies
may give workers special non-regular bonuses as a way of giving them
non-taxable income and thus a salary increase. Of course, the original
decision was filled with revolutionary intent, which can backfire when
reality hits.

Failed Plan: Two weeks ago General
Manager/Chief Justice/Commander in Chief/President Chavez had the brilliant
idea of stopping crime by placing two National Guardsman with FAL rifles on
every public transportation bus in the country. As everything in Venezuela,
this was simply improvised on his live reality show Alo Presidente, but
clearly the President had no clue that this would require more National
Guardsmen that the country had, without taking into account the danger of
untrained, armed soldiers on every bus. Some eager beavers took the
President’s words as an order and for one day many buses in Caracas carried
the two guards until someone realized what a stupid idea it was (I am sure
they never told Chavez). On top of that crime did not go down that day in
Caracas. The idea was dropped and the new “program” lasted only twenty
fours hours. Don’t complain, that is longer than many other programs
started by Hugo Chavez.

Somehow the picture above reflects what is happening in
Venezuela much better than any words I can put together.It was taken on Tuesday during the
parade in Campo de Carabobo, in celebration of the battle that gave the country
its independence.

First of all, Chavez spent this “celebration” talking about
politics and telling us why it is that “no volveran” (they will not comeback).
The problem is that it is no longer clear if he means “no volveran” or “yo no
me voy” (I will not leave), because nobody even seems to remember who it is
that will not come back.

Because Chavez used his speech to tell us who among his
former heroes will not come back. Baduel for example. Chavez’ former buddy,
friend, confidant and the man that saved Chavez’ rear end in 2002, we were told
that Baduel can go to hell and never come back. He then proceeded to do the
same with burping, bumbling idiot Acosta Carles, his self-appointed Governor of
Carabobo, famous for the burp that was heard around the world. One of the most
visible clowns of the revolution.

And we heard Acosta Carles come
on and say he forgives Chavez, sounding like the veritable clown he is.
Reminding Chavez that he saved his revolution with his burp. The guy is
actually quite proud of his silly moment in history!

And Acosta Carles turns the “Patria, Socialismo o Muerte” of
Chavez in a more benign “Patria, Socialismo o Amor”, certainly an improvement
and better than Chavez Minister of Defense that says
Socialism is life and that is why he is ready to fight for the revolution.

Another day, another clown.

And just to remind us that things can actually get worse
under Chavez, he praises his new hero he has found for poor Carabobo State:
That perverse and despicable journalist of La Hojilla named Mario Silva. I
mean, why does Chavez hate Carabobo so much? What did they do to him there?
Because Mr Silva has no redeeming qualities. No managerial experience. No
political following. Thus, Chavez wants him to be Governor of Carabobo.

And who would have ever thought that we may be grateful to
Acosta Carles for anything? Acosta Carles, while he apologized to Chavez, in
his delirium said that if the “people” want to be a candidate he will be.

Which is just a lesson he learned from the clown master
himself, Hugo Chavez, who always says he is doing things for the “people”, but
he only does what Hugo Chavez, wants. That’s the problem, Chavez has created
dozens of powerful monsters, which to us appear as clowns and now he does not
know how to stop them, but these clowns have undertaken a life of their own.

And then Chavez showed why he is the despicable autocrat he
is, when he said that he defended the Comptroller for disqualifying the corrupt
of the country. Corrupt? Not one person in the list of the Comptroller has been
tried or found guilty. Moreover, the most relevant ones are not being
disqualified for stealing money, but for changing line items in the budget, or
for violating obscure sections of the administrative code.

But nobody is disqualified, for example, for charging
commissions for giving bonds to anyone at a discount. Or even investigated for
example, for carrying suitcases full of cash in Government airplanes. Or nobody
has looked into the sudden wealth of Government officials, like Chavez’ family.
Or former Vice President Jorge Rodriguez. Or the multi million dollar apartments
in Miami of PDVSA Directors. Or the use of VTV for a political party. Or the
use of the Electoral Board for Chavez’ party’s primary? Or front running of
PDVSA bonds? Or Sovereign bonds? Or the sale of the Citibank building? Or the
drop of production of PDVSA? Or stealing the funds for the non-working sugar
plants? Or where did Juan Barreto find money to buy the Daily Journal? Or who
owns Banco Bolivar, Banco Confederado or Banpro? Or who acts an intermediary
for the structured notes and bonds sold by the Government (All 8 billion
dollars of them)? Or where did the money from the FIEM go in 2003 (we are
talking billions missing)?

I could go on but it would get boring, it is all in this
blog since August 2002.

And the clowns!

How about the Minister of Health who claimed the current
mumps epidemic was the fault of the prior Government because 14 and 15 year
olds were getting it and thus never got the vaccine, forgetting that four year
olds are also infected? Or the Tax Office guy this week saying there was no
Supreme Court decision on taxable salary, but it is right there on the Court’s
webpage? Or the defense of the Intelligence Bill by the usual people that suck
up to Chavez, until Chavez realized the issue was becoming too hot to keep and
dumped them? How about the crimes that are not relevant to society, like gang
homicides, jail killings and family disputes? Those don’t count for God’s sake;
they are irrelevant according to the Minister of Justice. Who by the way was
accused of a massacre when he was in the military during the awful days of the
Fourth Republic, but now sympathizes somehow with those on the other side of
the massacre!

And how about the military clowns? Do you realize that
almost none of the Ministers of Defense that Chavez has had could speak well?
Why is that? The last one can barely put a few sentences together and now
General Garcia Carneiro, one of the worst offenders of this, is being imposed on the people of Vargas
State as Chavez candidate for Governor.

As if the people of Vargas were not masochistic enough
already! An act of God destroyed their state in 2000 and Chavez is making sure
it stays that way and they keep voting for his people! They deserve Garcia
Carneiro! They deserve their children to speak up as incoherently as him and
their votes!

And today the National Assembly defends the Comptroller; one
day after saying the Moral Council’s attempt to remove two Supreme Court
Justices was illegal. And guess what? The Comptroller is one of the three
clowns in the Immoral Council!

We are now supposed to believe that the same guy who could
not read in the Constitution that decisions of the Council have to be unanimous
and by all of its three members, can understand more complicated things like
what disqualifying means, or what human rights are or how to even spell“Interamerican Convention on Human
Rights”

Just think, in ten years, only one-person has been found
guilty for corruption. That guy is probably innocent! Or stupid!

But of all the stupid and clownish things I have heard
lately, the best one has to be the General that said the media could be
prosecuted for revealing national secrets. What was the context?

Well, Clown #1 had ordered nine divisions to move to the
border with Colombia to defend the country. For two days, the media reported
that there had been no movement. That was when the Chief military clown
threatened to prosecute the media for “revealing” this national secret.

Of course, he never thought he should prosecute the Chief
clown for announcing the troop movement on National TV. Or making the decision
by himself without consultation in violation of the laws.

Or maybe, just maybe, he should have ordered an
investigation on why the clown troops did not obey the orders of the Chief
Clown?

Or why when the troops were finally mobilized, only a
fraction of what was ordered was mobilized.

Could it be that after US$ 9 billion in weapons purchases we
are still running in place like six years ago?

The problems is not the clowns, it is that by now, these guys think they can run the circus…

I have not written much about the “inhabilitaciones”, the
new black list by the Hugo Chavez administration, which my dictionary translates as
disqualifications, but does not seem quite right. In any case, I was waiting
for the time to register candidacies to be closer to talk about the issue in the still
naïve belief that the whole thing was so absurd, that it would surely go away.

But it hasn’t…it represents another black list and abuse of
power by this Government which is only efficient at violating people’s rights.

Absurd, because the procedure used to disqualify a person is
so ridiculous and simple and so dependent on a single person, the Comptroller,
that if the legislators had meant to it to be that way, they would have
realized what a mess it would be.

Just so that you understand the process, let me describe how easy it is to be disqualified. The procedure can be as simple as this:

-Someone from the Comptroller’s office or a citizen detects
or accuses someone of doing something improper.

-The Comptroller has the lawyers that work for him interview
the accused (without a lawyer being present), you are asked at the end to sign to certify that you said what is in the minutes typed by the lawyer interviewing you.

-The case is reviewed and at that point new questions may
arise which require a new meeting with the lawyer, at which point they will ask
additional questions and/or clarifications about the case. The lawyers will
then say what sections of the administrative code were violated and the case
goes to the Comptroller for a final decision.

-The Comptroller, alone and singlehandedly, decides whether
you have committed a fault and decides what to do. It can be as simple as a
fine or disqualifying you from being appointed to office for a certain period.
Up to a few years ago, it was never interpreted as you not being eligible to be
a candidate.

That’s how easy the process to “disqualify” you is in this
new revolutionary interpretation.

How do I know this? Easy. A few years ago, I was on the
Board of a Foundation associated with one of the universities in Caracas. We
signed a letter of intention to buy an office for Bs. 250 million (at the time
around US$ 300,000) and asked for a mortgage from a bank. On the day we had to
pass papers, the mortgage had not come thru, so the seller pulled out unless we
paid more, I don’t recall how much more but it was something like Bs. 20 or 30
million. The case came to the Board and we approved it because we could not
find anything cheaper and the location was perfect for the Foundation.

A couple of years later, someone went to the Comptroller’s
office and denounced that there had been a payoff of some sort and that was why
a higher amount was paid. The Comptroller opened the case and all eight members
of the Board were investigated and we all went to the Comptroller’s office
twice to testify or be interviewed. The lawyers conclusion was that we were not
guilty of what we were accused but we were in violation of the law for
attempting to borrow money without the Cabinet approving it (Despite the Foundation
not having received any Government funding since 1970). Thus, we were charged
with this different accusation and the penalty was a fine of what was then
about $700-800 and two years of disqualification from being named to any
Government position.

The case went to the Comptroller (Russian, the current one)
who decided we were not guilty. We never knew why he ruled that way; we were
just sent letters of good behavior, saying the case had been closed.

This is the first reason the whole thing is absurd, you cannot
have such a process dependent on one person and subject to manipulation. Yes,
you can appeal, but in the appeal, you just write why you are innocent and the
Comptroller once again decides what to answer back.

The fact that this is the case can be seen in the statistics
which show that 80% of those disqualified from running for office are
opposition in a country where the opposition holds less than 30% of the offices
in the country between Mayors and Governors. That extreme asymmetry is no
accident.

In fact, the Comptroller is not a judge, he can disqualify
someone from being appointed to office, but he can not stop them from being elected. The only way to take
away your political right to be elected is if a Judge finds you guilty. This is
not even just Venezuelan legislation, this is part of the Interamerican
Convention on Human Rights (The San Jose pact) which in its Article 23
clearly says that your political rights can be limited by a number of reasons
such as age, nationality and…”sentence, by the competent judge, in a penal
process”.Article 65 of the
Venezuelan Constitution establishes a similar limitation, which I still find it
hard to interpret in any other way, and takes precedence over any legislation
below it. But in any case, Venezuela signed the San Jose pact, which will
clearly delimit how anyone’s political rights can be taken away: Only by
sentence of a judge in a penal process.

Thus, we are once again facing a gross miscarriage of
justice by the Chavez administration, which has simply disqualified those
figures of the opposition that were a threat, while at the same time using
similar arguments to remove pro-Chavez figures from office in the case of those
Chavistas who were a nuisance to Chavez’ plans and desires, such as the
recently removed Governor of Yaracuy State.

If the rule of law existed in Venezuela, this would be
easily and readily fixed with a ruling from the Constitutional Hall of the
Venezuelan Supreme Court, but despite numerous injunctions submitted to that
body, the Court has either ruled against them or denied the injunctions on
technicalities.

All of this has been helped by the absolute obedience of the
Electoral Board, who despite the fact that none of them are lawyers, reached a
decision on the matter without even asking for an opinion from its legal
counsel.

I have no hope that this new black list by the Chavez
Government will be revoked. It is a Government for which the wholesale
violation of human rights represents no problem if they are in the way of the
empty political project of the Chavez revolution.

From the PDVSA workers, to the Maisanta list and now the
black list of the “inhabilitados”, it is a way of life for Chavez and his
comrades to perversely violate the rights of those that get in their way.

For a few weeks, there had been rumors that one of the
largest banks in Venezuela, Banco de Venezuela, owned by Banco Santander of
Spain, would be bought off by one of the largest banks at #5 in the country
Banco Occidental de Descuento (BOD), creating the country’s largest bank. What
was not clear was how the deal could be pulled off.

Then, at the beginning of this week, someone explained to me
that the transaction would simply be a hand off of the structured notes
denominated in Bolivars in the hands of BOD. Such notes are worth slightly above the half of the US$ 2.4 billion registered on the books. Santander would receive them and
ask the Government for the dollars at the official rate of exchange.

While I haven’t seen the numbers, it made some sense if the
regulator (the Government) allowed the transaction like it has allowed the
others that have taken place. For Santander, it would be an elegant way out of
the country (the bank has been rumored to be for sale for ages) and BOD would
get rid of the notes in its balance sheet, acquiring a very healthy bank with
the largest branch network in the country. Of course, the purchase would still
be suspicious in the sense that those notes were purchased with depositors
money.

That si why I started this series.

But then on Thursday there was a bombshell, the Government
issued a very strict resolution essentially banning any bank or financial institution
or even anyone currently owning more than 5% of any such institution from buying another
one, reaching an agreement to buy another one, without prior permission from
the Government. Moreover, the resolution bans the transfer of the structured
notes without the financial institution having prior approval from the
Government.

Lawyers are still arguing whether the resolution banks the
BOD/Banco de Venezuela acquisition as described, but most think the
Government’s resolution is airtight. But whatever interpretation anyone may
give it, to me it expresses in no uncertain terms that the Chavez
administration does not want the transaction. Thus, unless Chavez himself gives
the green light I don’t think the acquirer or the subject of the acquisition
will go ahead with it.

The puzzle is why it was blocked. All sorts of rumors are
flying around Caracas about this. There are basically two ways of thinking:
One, that blocking the transaction originates, as has become customary in the
robolution, in some parallel racket (guiso) being set up by someone else who wants to
by the same bank. The second one is that this reflects the arrival of the more
fundamentalist Ali Rodriguez to the Ministry of Finance and that he stopped it.
I would lean towards the first explanation, because it has always worked so far
when you are trying to find a rationale to some act by the Government that does
not make sense.

But the same resolution contained what to me is a somewhat
worrisome proposition: It orders auditors of banks to reflect as of June 30th.
2008 the quantitative impact of the notes being valued at its true worth.
Additionally, it bans any bank from divesting itself of the notes until the
Government approves it.

The problem with this is that June 30th is this
week and I doubt any bank is ready to divest. This means that the auditors will
look at he notes and calculate their value at the only exchange rate accepted
by the Government Bs. 2.15 per US$. But these notes are worth more than that
since the guarantees behind it are US$ which can be sold in the parallel swap
market currently around Bs 3.4 to the US$.. So, if you look at what the auditors will say, it will exaggerate the
loss incurred by these banks to the point that many will look absolutely
bankrupt.

Today the Minister of Finance complained
about this situation, saying bankers will have to capitalize their
institutions because they bought the notes with the depositors money. (Will all
of them?) And he is right. However, he fails to say that it was Chavista
Government officials that allowed this to happen without any action.

For a Government that likes to blame the 40 years of the
Fourth Republic for everything, this time around, it can’t use that excuse,
exchange controls have been in place since 2003 and all of these structured
notes were created since then.

Who is to blame?

I am pretty sure that not only will the Government not do
anything about prosecuting those buddies responsible for it, but I am sure all of them can run
for office in the November regional elections.

And will we see if the “guisos” continue now that Rodriguez
Araque is in the Ministry of Finance? He is supposed to be extreme radical, but
a straight arrow. His tenure at Finance will tell us if the latter is true.

On the left is a very nice Cattleya Walkeriana from Brazil. This is the first flowering of 24 plants a friend brought me about two and a half years ago from that country. Very Promising! On the right another Cattleya Aclandiae, notice how it is much darker than last week´s

On the left another one of my Laelia Purpuratas, On the right a very nice flared yellow hybrid called Blc. Dora Louise Capen

Growing your market share as a bank is not easy, you have to work hard,
do it for many years and convince depositors that they should prefer
you over your competitors.

On the way you also face many hurdles, economic swings can affect your
performance and if you stumble once, depositors and clients will never
forget it. While history says that “good” bankers are the ones that
grow their business organically, slowly and carefully, “nouveau”
bankers tend to want to grow faster by acquiring other institutions
and/or straying away from the core business of banking.

Venezuela is no different, for decades we have seen acquisitions and
takeovers as the way to grow banks and the last few years have seen
quite a few of those transactions. In many cases, these transactions
were made at prices which make no sense if you are a true banker.
Problem is, you may be stingy if you are buying something with your own
money, but if it is someone else’s money, you may not care if you are
paying too much.

In this third installment I explain how if you own a bank in Venezuela
today, it is possible to buy another one without putting up any money.
In fact, at the end of the day the transaction is such that the money
you used to buy the other bank simply “disappears” under the magical
world of structured notes.

Suppose you are a Venezuelan banker and you know one of your
competitors wants to sell. Unfortunately, you own a bank, but don’t
have enough money to acquire the other institution.

But wait! You have your depositors money…

For the sake of argument let’s say the bank is being sold for half a
billion dollars and your own bank has capital roughly the same as that,
but it has deposits that are eight times as much (US$ 4 billion). The
official rate of exchange is, of course, Bs. 2.15 per US$ and the swap
or parallel exchange market is at Bs. 4 per US$.

Well, you go to the parallel market and buy half a billion dollars using Bs. 2 billion of your depositors money.

But wait, there are regulations that say you can not have more than 30%
of your capital in foreign currency, thus, you turn around and give the
money to a European bank or Wall Street firm and ask them to issue a
“note”, guaranteed by them, but issued and denominated in Bolivars (2
billion) and having as its underlying asset the dollars you gave them.

This “note” is simply a contract between your bank and the other
financial institution and it is likely to have some conditions, such as
a rate of return, conditions under which get US$ or Bs. and even
clauses about borrowing against the guarantees.

From the point of view of your bank, you have done nothing but take
your depositors money Bs. 2 billion, “invest” it at the other
institution with a certain return, which is typically low. In your
balance sheet the money appears simply as an investment at XYZ Inc. in
Bolivars.

Now you ask XYZ to lend 80% of the guarantee at a market rate to a
company which is part of your financial group, as was pre-agreed in the
“note”.

This company in turn, goes and buys the bank that is on sale using your depositors money.

Voila!

You have acquired a bank with your depositors money, the money is no
longer there, but you have doubled the size of your holdings!

Hopefully, five years down the line, the parallel exchange rate will be
four times higher, you can bring bank the 20% of the original amount
that is left and tell the bank that hold the note to keep the other 80%
as you have no plans to pay back the loan. Or maybe the bank you bought
will make enough money to pay the loan back or a combination of both.

The point is that at the end you own that bank, for free! You put none
of your own money on the line and for quite a while you really don’t
even have the money you claim to have in your balance sheet and you are
circumventing Bank Laws by having more foreign currency than it is
allowed.

How many times has this been done in the last few years? At least four, as far as I can tell, but maybe more.

And I started this series because a fifth case was ready to be announced and may even still be announced, except that…

The Government decided to stop it for reasons that are not quite clear to me.

This time, the operation was going to be more sophisticated. Remember
that the Government issued a resolution ordering banks to get rid of
these notes? Well, one bank decided to do the following:

Rather than “get rid” of US$ 2.4 billion in notes that are worth about
US$ 1.2 billion, it offered to buy one of Venezuela’s largest banks by
handing over the notes to the owners of that bank.

In one swipe, this bank gets rid of these “bad” notes and acquires a healthy, large bank, one of the largest in the country.

Creative, no? Almost like magic…

Except that the Government decided to stop it this time around…

Next: Chavez Guisonomics 101, part IV: Why did the Government stop the latest bank takeover?

I am going to have to speed up this primer, as events that led me to
write part I have accelerated in an unexpected fashion, forcing me to
cover the material faster than I expected.

There is indeed no free lunch for Venezuela in always “making money”
when it buys Argentinean bonds even if they drop in value. In fact, you and I are simply paying
for it as usual, if you are naive enough to think the money is “ours”. The apparent free lunch arises from the fact that at
the end of the day, what is happening is that the Government is leaving
a lot of money on the table. Our money.

Let’s look first at the Government’s profit in our previous example:

The Government bought one million dollars of Argentinean bonds at 100%, sold them at 110% for a 10% profit of Bs. 215,000.

But suppose for a minute, that rather than buying bonds from Argentina,
the Government went straight to the banking system and offered to sell
them US$ 800,000 at Bs. 2.965 per dollar, the same amount and price at
which the bank effectively bought the dollars when it bought the
Argentinean bonds and sold them in the international markets in part I.

From the point of view of the bank, the transaction is identical, no?

But it makes a world of difference for the Government which now, rather
than making a puny 10% profit, will get (US$800,000x Bs. 0.815)=Bs.
652,000 for the transaction.

Huge difference, no?

Of course, the Government made now Bs. 652,000 on the transaction,
rather than Bs. 215,000, but on top of that, it sold US$ 200,000 less!

Who kept the difference?

Easy, Argentina, which received in the case of the bonds a full one
million dollars but the bonds later dropped 20% (US$ 200,000 less). And
of course, we Venezuelans are better in theoryof, because we all collectively
have US$ 200,000 more.(Even if we will never see it!)

Is the Government stupid?

Of course not.

First of all, it helps Chavez friends Mr. or Mrs. Kirchner in placing a billion or so
dollars of Argentina’s debt with one call. Second, by hiding the
transaction behind bonds, most people do not understand that the whole
thing is just a “guiso” or racket at the same time. (Call it corruption
if you like!). Third, the Government can maintain the official line,
that there is no and there will be no devaluation and dollars are worth
Bs. 2.15 per US$.

Because these type of transactions are given only to a select group of
“friendly” banks or financial institutions who are friendly because the
obviously pay somebody off, no?

But it doesn’t end here…because, why should the Government allow the
bank to make so much money. The bank buys each dollar at Bs. 2.956 and sells
it for Bs. 3.45, making a nice profit of Bs. 0.494 or 16.7% without
doing anything!

Thus, the more normal, regular, rational, customary and transparent
manner would be if the Government offered the same US$ 800,000 to ALL financial institutions at Bs. 3.4 per US$ for their customers. Then, the Government
would make US$ 800,000 x (Bs. 3.4-Bs. 2.15)=Bs. 1,000,000, rather than
Bs. 652,000.

The banks would make a tidy Bs. 0.05 per dollar, which adds up after a
few million dollars. That is the usual way foreign currency markets
work.

Thus, there is no such thing as a free lunch, just a bunch of people having a profitable lunch off us Venezuelans.

The word “guiso” in Spanish means “stew” and is used as
slang for those fraudulent transactions or deals that take place whenever
two or more parties find a way to fix things in such a way that they can make a
lot of money.

In the Chavez revolution, Guisonomics has truly become a
science thanks to the wonders and arbitrage provided by foreign exchange
controls. Simply put, the fact that the Government has access to or decides who
has access to foreign currency, allows it to generate huge amounts of profits
from the artificial arbitrage between the official and the parallel swap
exchange rate.

In fact, hiding behind the exchange controls, corrupt
Government officials can obtain illegal profits in magnitudes never seen before
in Venezuela’s history of corruption. Sometimes, there is not even enrichment
involved, just the ability to use creative accounting and the artificiality
of the exchange rate to help the revolution and/or its friends without most
people noticing or even realizing what is going on.

In this first installment of Guisonomics 101, I will
describe the simplest transaction there is, in order to prepare you for some
transactions that I expect will be in the news in the next few days.

If you have been following the news lately fo example, Argentinean
bonds have
been dropping like a stone in the last few days as the conflict between the
Kirchner Government and the farmers has intensified. In fact, talk of a second
Argentinean default in this decade have also
intensified as that country’s debt levels reach historical highs once
again.

But if you have been following the news, it has been Chavez
and Venezuela that have been saving the day for Argentina buying close to US$
6.5 billion in the last three years of the countrys’ debt.

Only three weeks ago, Venezuela bought about US$ 1.4 billion
of that country’s bonds the so called Boden issue, of which between US$ 400 to US$ 600 million has
been sold by the Government in order to lower the parallel swap rate. Thus, there is about US$ 800 million left and their prices have been dropping.

But, you may wonder, has Venezuela lost money because these
bonds have dropped in the international markets?

The answer is no, because thanks to some of the elemental
principles of Chavista Guisonomics, for the Venezuelan Government it is very
difficult, if not impossible, to lose money in
these transactions.

Say what?

This almost magical trick is possible, because
accounting-wise, for the Government all Bolivars are valued at Bs. 2.15 to the
US$, while it can manage to sell dollars at a much higher rate in the swap market.

Let’s look at an
example:

Suppose the Government buys one million dollars of
Argentienan bonds. From an accounting point of view, only the exchange of
Bolivars is registered, thus, the US$ 1 million cost Bs. 2.15 million.

Let us assume, that the Venezuelan Government bought the
bonds at a price of 100% and that they drop 20 points to 80%. (These prices are
faked for illustration purposes). How can the Venezuelan Government make money
if they have dropped so much?

Easy. It can sell these bonds to a local bank at 110% of its
value, but at the official rate of exchange of Bs. 2.15 per US$. Thus, the Government bought the bonds
at 100% and sold them at 110% for a tidy 10% profit of 215,000 Bolivars, even as the
bonds dropped in price.

But why would the local bank buy them? Also easy. The local
bank paid 110% for them at the official rate of exchange or Bs. 2.365 million
(1.1×2.15).

But then it turns around and sells the bonds at 80% of their
value in the international markets. Thus, it receives US$ 800,000 for them.
Thus, the local bank paid in the end Bs. 2.956(Bs. 2.365 million divided by US$ 800,000) for each dollar
it receives.

But since the swap rate is somewhere between Bs. 3.4 and 3.5
per US$, the local bank makes roughly half a Bolivar per dollar or 16.9% profit
in the sale of those US$800,000 to the swap market.

Thus, the Government makes money, the bank makes money and
there is indeed such a thing as a free lunch in Chavista Guisonomics.